Quandary Of Dissenting Financial Creditors Having Security Interest: Perhaps Supreme Court's Larger Bench To Guide Dissenting Financial Creditors

Factual Scenario:

The case at hand involves DBS Bank Limited Singapore (hereinafter “DBS Bank”) and its financial dealings with Ruchi Soya Industries Limited, the Corporate Debtor. DBS Bank extended a financial debt of USD 50,000,000 to Ruchi Soya Industries, secured by a first charge over specific immovable and fixed assets. The Corporate Insolvency Resolution Process (hereinafter “CIRP”) was initiated against Ruchi Soya Industries, and a resolution plan proposed by Patanjali Ayurvedic Limited was approved by the Committee of Creditors (hereinafter “CoC”), despite objections from DBS Bank.

DBS Bank, as a dissenting financial creditor, expressed concerns over the proposed distribution, emphasizing the superiority of its security interest. However, the CoC approved the resolution plan, and DBS Bank's objections were dismissed. Amendments to Section 30(2)(b) were introduced in August 2019 through the Insolvency and Bankruptcy Code (Amendment) Act, 2019. The amended provision stated that dissenting financial creditors shall not receive an amount less than the liquidation value of the Corporate Debtor under Section 53(1) of the Code.

Despite the amendments, CoC declined to reconsider the distribution of proceeds, citing ambiguity and the pendency of DBS Bank's appeal. The National Company Law Tribunal, Mumbai (hereinafter “NCLT”) eventually approved the resolution plan. DBS Bank continued to challenge the approval through appeals before the National Company Law Appellate Tribunal (hereinafter “NCLAT”), which were dismissed and the matter came to the Supreme Court for adjudication.

In its submissions, DBS Bank argued that the pro-rata distribution disregarded the exclusive and higher value of its security interest, resulting in an unjust distribution. The DBS Bank claimed it would receive approximately Rs. 119,00,00,000/- against the liquidation value of its security interest of Rs. 217,86,00,000/-, while its admitted claim was Rs. 242,96,00,000/-.

Analysis and Observations by the Supreme Court:

The Supreme Court, in its analysis, referred to Section 30(2) and (4) of the Code. It emphasized that dissenting financial creditors are entitled to payment not less than the amount payable under Section 53(1) of the Code in the event of liquidation of the corporate debtor. The Court acknowledged that all financial creditors may not be similarly situated, especially in terms of their security interests. In this regard, while interpreting the provisions of Section 30(2)(b)(ii) of the Code, the Supreme Court observed at para 25 of the DBS Bank judgment, that:

“As we read Section 30(2)(b)(ii), the dissenting financial creditor is entitled to payment, which should not be less than the amount payable under Section 53(1), in the event of the liquidation of the corporate debtor. The provision recognizes that all financial creditors need not be similarly situated. Secured financial creditors may have distinct sets of securities. There are a number of decisions of this Court, viz. Committee of Creditors of Essar Steel India Limited (supra)[iii], Swiss Ribbons Private Limited v. Union of India[iv], and Vallal RCK v. Siva Industries and Holdings Limited[v], which have held that the commercial wisdom of the CoC must be respected. Therefore, the resolution plan accepted by the requisite creditors/members of the CoC upon voting, is enforceable and binding on all creditors. The CoC can decide the manner of distribution of resolution proceeds amongst creditors and others, but Section 30(2)(b) protects the dissenting financial creditor and operational creditors by ensuring that they are paid a minimum amount that is not lesser than their entitlement upon the liquidation of the corporate debtor.

Therefore, while the DBS Bank judgment cites relevant decisions such as Committee of Creditors of Essar Steel India Limited (supra), Swiss Ribbons (supra), and Vallal RCK (supra), which emphasize the importance of respecting the commercial wisdom of the CoC, it also noted that, while a resolution plan, once accepted, is enforceable and binding on all creditors, Section 30(2)(b) protects dissenting financial creditors by ensuring they receive a minimum amount not lesser than their entitlement in the event of liquidation.

The Court further observed that on the approval of a resolution plan, the unwilling secured creditor must forfeit the security and is entitled to its liquidated value. However, it clarified that Section 30(2)(b)(ii) safeguards the dissenting financial creditor from settling for a lower amount than its entitlement under liquidation. It was observed that, “The provision is enacted to protect the minority autonomy of creditors. It should not be read down to nullify the minimum entitlement. Section 30(2)(b)(ii) forfends the dissenting financial creditor from settling for a lower amount payable under the resolution plan.”

More importantly, the DBS Bank judgment casts doubt on the correctness of the India Resurgence ARC judgment (supra), pointing out contradictions in its reasoning and discord with the decisions in Committee of Creditors of Essar Steel India Limited (supra) and Jaypee Kensington Boulevard Apartments Welfare Association & Others v. NBCC (India) Limited & Others[vi]. The Court expressed reservations on specific paragraphs of the India Resurgence ARC judgment and asserted that dissenting financial creditors are entitled to a minimum value equivalent to the liquidation value of their security interest. The Court observed that,

“…the provisions of Section 30(2)(b)(ii) by law provides assurance to the dissenting creditors that they will receive as money the amount they would have received in the liquidation proceedings. This rule also applies to the operational creditors. This ensures that dissenting creditors receive the payment of the value of their security interest...”

Further, while referring to and extracting various relevant portions of Committee of Creditors of Essar Steel India Limited (supra) and Jaypee Kensington (supra), the Court, opined its reservations on view expressed in paragraphs 17, 21 and 22 of the India Resurgence Arc judgment (supra) and observed the following:

• …The observation that a dissenting secured creditor cannot suggest that a higher amount be paid to it is also correct. However, this does not affect the right of a dissenting secured creditor to get payment equal to the value of the security interest in terms of Section 30(2)(b)(ii) of the Code. [regarding para 17 of India Resurgence Arc (supra)]
• …It is correct to the extent that the legislature has not stipulated that the dissenting financial creditor shall be entitled to enforce the security interest. However, it is incorrect to state that the dissenting financial creditor would not be entitled to receive the liquidation value, the amount payable to him in terms of Section 53(1) of the Code. [regarding para 21 of India Resurgence Arc (supra)]
• …The reasoning given in the earlier portion of paragraph 22 in our respectful opinion is in conflict with the ratio in Committee of Creditors of Essar Steel India Limited (supra) as it does not take into account the legal effect of Section 30(2)(b)(ii) of the Code. While it is important to maximise the value of the assets of the corporate debtor and prevent liquidation, the rights of operational creditors or dissenting financial creditors also have to be protected as stipulated in law. [regarding para 22 of India Resurgence Arc (supra)]

Having regard to the above observations, the Court highlighted that Section 30(2) of the Code refers only to the sum of money, not permitting the dissenting financial creditor to enforce the security and sell it. The Court further observed that enforcing the security interest in its entirety would be counterproductive and may nullify the resolution plan. Instead, the dissenting financial creditor is entitled to payment, not less than the value of its security interest.

Thus, as per the observations of the Supreme Court in DBS Bank judgment (supra), what the dissenting financial creditor is entitled to is the monetary payment, which should not be less than the amount/value of the security interest held by it. The security interest gets converted from the asset to the value of the asset, which is to be paid in the form of money. Therefore, the Court in simpler words meant that, it is not the security asset which matters rather it is the minimum value of asset at the relevant time which matters in so far as the payment to dissenting financial creditor is concerned in a resolution plan. The aforesaid understanding finds force from the observation of the Court that;

“A dissenting financial creditor is entitled to not partake the proceeds in the resolution plan, unless a higher amount in congruence with its security interest is approved in the resolution plan. The “amount” to be paid to the dissenting financial creditor should be in accordance with Section 53(1) in the event of liquidation of the corporate debtor. In other words, in our opinion, the dissenting financial creditor is entitled to a minimum value in monetary terms equivalent to the value of the security interest.”

In conclusion, the DBS Bank judgment (supra) finds the current legal position to be in line with protecting the minority autonomy of secured creditors and ensuring dissenting financial creditors to receive at least the minimum entitlement, equivalent to the liquidation value of their security interest. However, recognizing the conflict with the India Resurgence ARC judgment, the Bench led by Justice Sanjeev Khanna referred the issue to a larger Bench for examination and resolution, acknowledging its significance and potential wide-ranging ramifications in the insolvency & bankruptcy regime. The fate of dissenting financial creditors with superior security interests will be determined by the larger Bench in due course.

Going forward, having regard to the observations made in the DBS Bank judgment, as has rightly been observed, and considering the current legal position post 2019 amendment, the ratio laid down by the larger Bench of the Supreme Court will give adequate clarity to the financial creditors having superior security interest as to whether they should give their assent to the proposed resolution plan or to dissent from the approval of the same. The DBS Bank judgment, at least, though it cannot be considered a precedent, have observed to the extent that dissenting financial creditors having a higher and superior security interest cannot be bound by the majority-approved resolution plan rather they would be entitled to the minimum monetary value of their security interest which ought to have been received at the time of liquidation of the said security interest. This will also be a decisive factor regarding approval or disapproval of resolution plans as the secured financial creditors will be in a better position to decide which side to choose during the voting on a resolution plan and more so, this will ensure adequate allocation to the secured financial creditors in any proposed resolution plan. However, fate of the dissenting financial creditors now depends on the decision of the larger Bench of the Supreme Court.

The author is an Advocate practicing at the Supreme Court . Views are personal.